The duty of good faith is often considered the most fundamental principle underlying a partnership. If you are a member of a partnership or considering joining a firm of partners, it would be a prudent step to familiarise yourself with the basic principle.
Basic Definition
Section 28 of the Partnership Act 1890 expresses a general duty that partners have to each other as follows:
“Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives.”
In broad terms the Partnership Act obliges partners to act honestly and truthfully at all times in matters concerning the partnership and in their dealings with each other. More specifically, it requires that they disclose any benefits derived from the partnership that of which the other partners are unaware (see section 29 of the Partnership Act) and also any acts of misconduct.
The Duty in Practice
The duty is reciprocal - partners can only expect to rely on the good faith of the other partners if they themselves conform. However, it will not necessarily prevent a partner making preparations to leave the partnership or set up on their own. Where powers of discretion are granted to a partner, for example to manage a firm, the duty still applies, so the managing partner cannot exercise powers in an arbitrary or capricious way.
Remedies for Breach
Breach of the duty of good faith can give rise to claims for damages or equitable compensation, payable by the partner who has failed to act honestly or truthfully of who has failed to make full and frank disclosure of relevant matters to the other partners. In less serious cases of non-disclosure, benefits may simply be accounted for and deductions made.
Exclusion
Partners may exclude by agreement many provisions of the Partnership Act, including sections 28 and 29. However, there is little authority on whether the common law duty of good faith can be excluded and in practical terms it may not make sense to do so given the nature of partnership and the fact that the duties of good faith partners owe one another is one of the major benefits of the partnership as a business vehicle .
Specific issues such as the duty of good faith must be considered before entering a partnership and individuals should take appropriate legal advice. Rollingsons has lawyers experienced in partnership and company law matters so if you need advice or would like more information please contact James Crighton via e-mail jcrighton@rollingsons.co.uk or by phone on 0207 611 4848.
